Thursday, 16 February 2012

Correction Likely Underway

Morning All

I know what you are thinking- calling the top after 1 down night is foolish! Well hear me out.

First things first. The S&P500 made a new high and then swiftly reversed. The DAX and the DOW Industrial both failed to breach their highs which is a bearish divergence. EUR continues to trend lower and AUD once again failed to challenge it previous highs. Despite the S&P500 making new highs, NYSE advancers hit a high of 2000 (vs previous highs of 2600) before closing at 1220.

Yesterday I said that the higher low on strong volume in the S&P500 was indicative of more strength to come and a move above 1350 should be expected. We got that and then dramatically reversed. In fact, it was a classic pop and drop with a number of stop orders going off only to be met with no genuine buying. That is a failed breakout pattern. The lack of follow through and strong reversal is a key tell that the nature of this market is changing. Luckily I covered my short at breakeven (almost) during Asian hours before the big rip. I am now looking to get short once more in the mid to high 40s with a stop above last nights high.

Emini S&P500 15mins:
Failed breakout. Remember failed patterns are the best. Supports are stacked everywhere from 1330 to 1337 and thus I anticipate we will hold in short term. Trend followers should buy these supports with tight stops. I am looking to short a retest of 1350.

Sometimes you have to keep it simple. These Daily charts couldn't be more clear.

DOW Industrial Daily:
Right in the Double Top zone. A candle reversal pattern is building.

Want an example of these Double top Daily trades? Look no further than the S&P500 in 2010:

S&P500 Daily 2010:
This Double Top trade led to a 50pt pullback

Nasdaq 100 Daily:
I showed a great chart the other day with the Nasdaq 100 RSI at 85: One of the most overbought readings I have ever seen. Last night we saw a huge bearish reversal candle right out of 2600. That reversal candle is indicative of major exhaustion!

There are also some clear wave counts to support an end to this impulse:

S&P500 Cash 30mins:
I showed this in the past and now it is complete. We have a clear 9 wave advance out of the last major swing low. I have kept this very simple noting all the major highs and low. Last nights squeaker high completes the sequence and impulse. Correction now underway.

If you want more specifics, this count couldn't be more ideal:

S&P500 Cash 30mins:
A complete 5 wave advance with peak momentum readings in the 3rd of 3rd zone which they should be. The higher low on Wednesday was the C leg of a 4th wave pattern and last nights failed breakout completes the 5th wave.

One more bit of evidence is the AUD which I have talked about a lot recently:

AUD March 60mins:
This sure looks like a topping pattern to me with clear boundaries. The first test of support always holds in uptrends. Any retest of that neckline will result in a strong breakdown to me. Risk markets arnt going to fall unless this one does. Once again, note a new S&P500 high with AUD still well off its recent highs.

Now I am not saying this is the TOP TOP of the market and we are set to crash. I am saying that I think a correction is underway. I have no idea the shape, form, magnitude of this. As a trader we can never predict the outcome of a trade. All we can do is manage the position after the trade has been made and monitor the markets behaviour. To emphasise once more, as a swing trader the main goal is to minimise risk. The low risk trade is either to buy supports in the 1330s with v.v.tight stops or to get short back into the mid to high 40s with stops above 1358. Given the Daily picture and the charts I have shown, a bigger pullback is the more likely scenario. Everyone will probably be expecting the S&P500 to hit that 1370 previous high but the market is never going to play out in the obvious way.

Despite seeing US markets on a tipping point, Australia appears to be right on the low end of its range. Very simply, if the SPI doesn't hold 4180/4190 early, then we are looking at a major breakdown to 4125 first target at a minimum.

SPI March 60mins:

My SPI Range: 4140 to 4220. Outlier levels 4125 and 4230. This range implies that the 4180/4185 zone does not hold. I have no idea if it will to be honest.

My SPI day trading plan: I will look to BUY supports straight up at 4180 to 4185. This is a major zone of support and thus we have to buy it first and only get short if it drops. This is a low risk trade. If we do not hold in immediately, I feel we could be looking at a genuine break and trend lower into 4140 and then 4125 (unlikely today). Thus I will look to short at around 4170/75 if those 80s drop. The first 30mins will be key in shaping the course of the day.